Former company director found to have misappropriated business opportunities loses expenses appeal 

Lord Tyre
Lord Tyre

The former director of a media company who objected to the amount of legal expenses he was calculated to owe to his former employer has been unsuccessful in challenging the decision. 

In the action by CJC Media (Scotland) Ltd against Kenneth Sinclair, a former director of the company, the defender was found to be in breach of his fiduciary duty. The defender lodged a note of objections on the basis that he had enjoyed substantial success in the action. He had previously failed to raise derivative proceedings against the pursuer. 

The note was heard in the Outer House of the Court of Session by Lord Tyre

Abandoned parts of the case 

The pursuer raised an action for count, reckoning and payment due to the defender breaching his fiduciary duty by appropriating a particular business opportunity for the benefit of a company that he formed after resigning as a director of the pursuer. Lord Doherty in the Outer House held that the defender had an obligation to account to the pursuer for the profits of the appropriated opportunity for 12 months. 

Lord Doherty found the defender liable for the expenses of process up to 1 February 2019 with a modification of 20 per cent. The account was remitted for taxation by the Auditor of Court. Settlement terms were agreed shortly before the proof date in relation to the accounting for profits. In June 2019 the defender was found liable for the expenses of process to date insofar as not already dealt with. 

After the diet of taxation, both parties lodged notes of objection to the Auditor’s report, with only the defender’s note being insisted upon by September 2020. The day before the hearing on the notes, the defender’s agents withdrew from acting, with the parties agreeing that the matter should be decided on the written submissions alone. 

The defender objected to the Auditor’s report generally on the basis that he had had substantial success in the action. The pursuer had abandoned parts of its case relating to seven of eight separate breaches of fiduciary duty they sought to establish, and these had generated the most legal expenses for the pursuer. The pursuer was also held to only be entitled to 12 months of profits from the remaining breach as opposed to the 48 they originally sought. 

It was also submitted that certain averments made by the pursuer had been false, and that some of the business opportunities the pursuer had accused the defender of diverting to himself had in fact been appropriated by the pursuer’s other director, indicating that the case had been presented in bad faith. 

The defender additionally lodged four specific objections to the report connected to the service of summons, copying of documents, expenses of responding to the specification of documents, and to the allowance of expenses relating to the pre-trial meeting. 

Clearly within the scope of discretion 

In his decision, Lord Tyre began by outlining the general principles he was required to apply, saying: “The role of the court in reviewing decisions made by the Auditor in taxing an account is limited to assessing whether the Auditor has misdirected himself in law, taken irrelevant considerations into account, failed to have regard to material considerations, or misunderstood the factual material before him. Beyond that, the court acknowledges and respects the expertise and experience of the Auditor in reaching a view as to whether particular expenses are to be allowed.” 

Evaluating the Auditor’s approach in this case, he said: “The approach taken by the Auditor, as described above, to the abatement of entries in the pursuer’s account fell clearly within the scope of his discretion. He rejected the proposition that all entries should be abated by 7/8ths and instead sought to identify entries relating exclusively to the claims abandoned by the pursuer, which were disallowed in full.” 

He continued: “In relation to items for which a minimum charge was made, he took the view that that charge should be allowed in full, presumably on the basis that ex hypothesi that amount would have been charged regardless of whether it related to one or to eight heads of claim, and that there was accordingly no basis for applying a further discount. I can detect no error of law or misunderstanding of fact in the Auditor’s approach, and accordingly there is no basis upon which the court ought to interfere with it.” 

Addressing the defender’s argument that the pursuer was in bad faith, he said: “Even if the matters now complained of (if true) had come to light before the diet of taxation, they would not in my view have fallen within the scope of the Auditor’s discretion.” 

He continued: “They would have been relevant, if at all, to allowance or modification of an award of expenses, which would have been matters for the court and not, for the reasons explained above, matters for the Auditor to take into account when deciding which items in the pursuer’s account to allow or abate.” 

For these reasons, the defender’s general objections were repelled. The defender’s specific objections were also repelled on the grounds that they were matters for the Auditor’s discretion with no legal basis for their disturbance. 

© Scottish Legal News Ltd 2021

Other judgments by Lord Tyre